Nearing Retirement? Learn Required Minimum Distribution Rules

April 2, 2014

If you’re a participant in an employer-sponsored qualified retirement plan, like a 401(k) plan, the plan itself may dictate when you must begin taking distributions. If the plan is silent, distributions must begin by April 1 of the calendar year following the later of:

• The year in which you reach age 70 1/2, or
• The year in which you retire.

However, if you’re an owner of the business (i.e., have 5 percent or greater ownership), you are subject to the same rule as IRA owners. That means your distributions must begin based on reaching age 70 1/2 even if you have not yet retired.

If you’re not an owner of the business, check the specifics of your plan. The plan itself may provide that the required beginning date for all employees is based on reaching age 70 1/2 and cannot be delayed by continuing to work.

Failure to begin required minimum distributions (RMDs) can result in a penalty tax equal to 50 percent of the difference between the amount that should have been withdrawn and the amount that was withdrawn. However, the penalty may be waived if the shortfall in the distribution was due to reasonable cause and reasonable steps are being taken to remedy it.

If you have several traditional IRAs or qualified plan accounts, the amount of each RMD is calculated separately for each IRA. However, the RMD amounts for the separate IRAs may be totaled and the aggregated RMD amount may be paid out from any one or more of the IRA accounts.

For employer-sponsored plans, the amount of each RMD must be calculated and paid separately from each qualified plan. The RMD for one plan account – other than an IRA account – cannot be aggregated with the RMD from another plan and distributed from one plan.

If you will attain age 70 1/2 during 2014, you should consider some planning opportunities concerning your RMD. In general, 2014 will be your first distribution year. However, you may postpone the first RMD until the second distribution year (i.e., take the first RMD by April 1, 2015).

But waiting until 2015 will result in your receiving two distributions in a single year. Consult with your tax adviser to determine which course of action will result in the least amount of tax.

If you are considering a rollover from a traditional IRA to a Roth IRA, keep in mind that RMDs cannot be part of the rollover.